AltShares Merger Arbitrage ETF
Q1 2007 Earnings Call Transcript

Published: 19 Apr 2007

Operator:

Good morning, ladies and gentlemen. My name is Nia, and I will be your conference operator today. At this time I would like to welcome everyone to the Arbitron first quarter 2007 earnings conference call. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Thom Mocarsky. Sir, you may begin your call.
Thom Mocarsky Senior Vice President for Press And Investor Relations:

Good morning ladies and gentlemen and welcome to Arbitron's first quarter 2007 earnings conference call. I am Thom Mocarsky. I am the Senior Vice President for Press and Investor Relations, and I will be your moderator for today's call. Today I would like to introduce Steve Morris, President and Chief Executive Officer; and Sean Creamer, our Chief Financial Officer. In today's call Steve and Sean will review our activities, accomplishments, and financial results for the first quarter 2007. After the presentations, Steve and Sean will be happy to take your questions. However, before we begin today's presentation I do want to note that this morning's discussion includes forward-looking statements. These forward-looking statements are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations about future events. We have derived these expectations from the information that is currently available to us. Actual results might differ materially from the results projected in the forward-looking statements, which involve both known and unknown risks. For a discussion of the factors that could cause our actual results to differ materially from these forward-looking statements, please refer to Arbitron's 10-K for the period of December 31, 2006. A copy of that 10-K is on file with the Securities and Exchange Commission. At this time I want to turn the call over to Steve Morris, our President and Chief Executive Officer.
Stephen B. Morris:

Good morning everyone. It is again a pleasure to have this opportunity to update you on our results for the first quarter and our progress on PPM and Apollo. The first quarter revenue was up 7.9%, a number that was aided by the fact that we had some PPM equipment sales that added 0.8% to the 7.1% underlying trend. Cost and expenses driven of course by PPM implementation were up 18%. This increase had the effect of lowering EBIT by 15% versus a year ago, leading to earnings per share of $0.52, down 10.3% versus a year ago. These results track well with our expectations for the year that we had previously communicated. Our marketplace firmed a bit from where it was in 2006, and the revenue outlook for the radio industry is currently judged to be in the plus 1 to 2% range. The news of course has been focused on the private equity bid for Clear Channel, rumors of other similar transactions, and the reality of Clear Channel selling off its smaller market stations. In general, all these transactions seem to have had relatively little impact on our business, and we continue on the moderate growth track that we have been on with our core business. We did announce during the quarter that we are shutting down our Mexico diary-based service. We spent several years developing this service to meet the needs of the Mexican market. And we won accolades for the quality and credibility of the information we produced. However, at the end of the day the market was simply unwilling to pay enough to make this a viable business proposition. The shutdown will have minimal impact on the bottom line. Turning to PPM, the only customer news was, first, Cox's decision encode in Houston, and then Clear Channel's decision to encode and subscribe in Philadelphia. The Philadelphia market gets its first PPM currency release on April 27, a major event I think in the history of this evolution from diary to electronic measurement. The next major event will be Houston's PPM currency release in late July. All of the major Houston stations are now encoding, but we still have many PPM subscription contracts to get signed. In the meantime, we are building the panel for New York. We are about 40% complete, and we expect currency delivery in December. I mention these events quickly, but in fact it is incredibly hard executional work. Every market is unique. And while we are moving up the learning curve, the organization is working at maximum capacity. Of course, we will ensure that the research is right. And we are extensively training both buyers and sellers on how to work with the new data. In Apollo, the focus is also on execution. We are moving this toward customer decisions in the second half of the year. And I really have no other news to report at this time. Internationally, aside from Mexico, we did announce this week that we and our partner TNS were awarded the Iceland joint TV and radio contract. Financially this is not material, but it is the first electronic multimedia measurement contract anywhere in the world. And we were chosen in competition with the GSK Watch (NYSE
Sean R. Creamer:

Thanks Steve, and good morning everyone. I am going to take a few minutes to review with you our financial results for the first quarter and provide some color on our progress. And then we will open it up for questions. Jumping into the financial results for the first quarter, revenue was $91.8 million, up $6.7 million, or close to 8% compared to the first quarter of last year. Our previously issued guidance for the year is for revenue growth between 5.5 and 7.5%, so we are tracking well for the year at this point. During the quarter, we had incremental revenue from international PPM equipment sales versus the first quarter of last year of roughly $700,000. The timing of these sales has no particular seasonality rather they occur as the new international business opportunities arise, and to a lesser extent based on demand for replacement or expansion equipment in existing countries. If you exclude the impact of the equipment sales in both quarters, revenue growth was 7.1%. Cost of revenue was $32.3 million for the first quarter. That is up $8 million, or 33%, compared to the same period last year. As I have been noting for some time beginning this quarter PPM operations costs, previously reported in R&D, are now presented in cost of revenue since we are generating PPM revenue. In addition to the classification of expenses we are incurring incremental costs versus the first quarter of last year, predominately relating to management and recruitment of the PPM panels for Philly and New York. As Steve mentioned, we're about 40% of the way towards completing the New York panel scheduled to commercialize in December, which is consistent with our statements regarding the front-end investment required in advance of revenue generation in each market as we rollout PPM. These increases are offset somewhat by a reduction of $1.1 million in Apollo-related costs, most of which are now reflected in our equity and net income of affiliates line, as I will discuss in a moment. Selling, general and administrative expenses were $20.4 million for the first quarter, up approximately $900,000, or 4.6%, for the first quarter compared to the first quarter of '06. For the quarter we recorded share-based compensation of $1.3 million, most of which is reflected in SG&A. And this is roughly flat with the share-based comp reported in the first quarter of '06. Research and development expense was $10.7 million, up $756,000, or were 7.6% compared to the first quarter of last year, growing in line with our revenue. Historically one of the most significant costs included in R&D is IT. For the quarter we had increased IT spend of $2.1 million, the majority of which relates to PPM. We also continue investing in our clients' software offerings to provide our customers with the tools they need to maximize the value they get from our data, which is an even more important service offering with the enhanced data available through PPM. Our proportionate share of the net loss of affiliates was $3.8 million for the quarter, $1.4 million greater than the loss reported in the first quarter last year. Keep in mind that beginning in 2007, and more specifically starting February 1 of this year, equity income and loss of affiliates includes, in addition to our share of the net results of our Scarborough joint venture, 50% of the net loss from the Apollo joint venture. In 2006, our share of Apollo costs was included above the line in our costs and expenses, mainly in cost of revenue. In 1Q '07 only those direct costs incurred prior to the formalization of the LLC agreement on February 1 and indirect support costs not shared by the partners are reflected above the line. For the quarter net non-LLC Apollo-related costs were a little under $800,000. Our share of the proportionate loss of Apollo for February and March of '07 was $1.1 million. So in total, our Apollo-related costs for the quarter were $1.9 million. With respect to Scarborough, our share of the net loss for the first quarter was $2.6 million. This compares to a loss of $2.4 million recorded in the first quarter of '06. This modest increase loss is consistent with our guidance for Scarborough to be down slightly for the full year due to planned investments in new products. Scarborough seasonality is such that very few reports are released in the first quarter. We continue to record expense during the quarter, but since we recognize revenue only when the product is delivered, Scarborough historically reports a loss for the first quarter. For the first, for the quarter net interest income was $486,000 versus net interest income of $44,000 in the first quarter last year. The fourth quarter '06 repayment of our $50 million senior secured note accounted for the nearly $850,000 reduction in interest expense, which more than offset the reduction in interest income of $406,000 attributable to our lower cash balances. Income taxes for the quarter were $9.7 million, resulting in an effective rate for the quarter of 38.4%. This rate is a bit higher than our previous full year guidance, and is attributable to the acquired adoption of new rules governing the accounting for uncertainties in income taxes released by the Financial Accounting Standards Board last year. These rules change how companies account for uncertain income tax positions, and specifically impose a higher standard before tax benefits can be recognized in a company's financial statement. While by no means material, the change did result in a slightly higher tax rate in this quarter of adoption. For the full year, we are projecting an effective rate closer to 38%. Net income was $15.5 million, or $0.52 per diluted share, compared to $18.2 million, or $0.58 per diluted share in the first quarter of last year. EBIT was $24.7 million for the quarter. That is down $4.3 million from the $29 million reported in the first quarter of last year. Depreciation and amortization for the quarter totaled $2.7 million versus $2.1 million in the first quarter of '06. The roughly $600,000 increase is attributable to the increased CapEx required to support PPM initiatives, including Apollo. The CapEx for the quarter was $24.2 million. Our balance sheet remained solid as we ended the quarter with $68.7 million in cash and short-term investments, and no long-term debt outstanding. As you know, we have Board authorization for a stock repurchase program of up to $100 million that extends through December 31, 2008. We did not repurchase any shares during the first quarter. However, since then we have acquired roughly 47,000 shares at a cost of approximately $2.2 million. Our cash flow from operations for the quarter was $10.1 million. Our guidance for full year EPS is $1.30 to $1.50. And as I mentioned in the last call, the low end of the range contemplates a scenario where PPM holdouts remain unsigned for the entire year. Since that guidance was issued, Clear Channel has signed a Philadelphia-only PPM contract. However, we are not modifying our revenue guidance at this time, as it is still very early in the year, and we're still working towards PPM commitments from other broadcasters, most notably Cox, Cumulus, and Radio One, as well as commitments from Clear Channel in the other markets scheduled to commercialize in 2007, namely Houston and New York. As Steve noted, we did announce our decision to shut down our Mexico diary measurement service. This operation was a very small part of our business, accounting for roughly $1.3 million of 2006 revenue, and a modest operating loss. We are reiterating our 5.5 to 7.5% revenue growth despite this loss of revenue which was not contemplated in our original guidance. From a seasonality perspective, the transition to PPM will have an impact. Historically, due to the timing of the delivery of our books, the first and third quarters have been our strongest. We recognize revenue for services over the terms of the license agreements as the services are delivered, and expenses are recognized as they are incurred. With our diary, all 299 measured markets are measured at least twice a year, the spring and fall surveys. The major markets are measured two additional times per year, with the winter and summer surveys. Our revenue is higher in the first and third quarters as a result of the delivery of the fall and spring surveys to all the markets versus the second and fourth quarters when the delivery of the winter and summer surveys are made only to the major markets. Our expenses are generally higher in the second and fourth quarter as we conduct the spring and fall surveys. With PPM initially in the top 50 markets, our service is going to be delivered monthly and therefore will serve to spread revenues a bit more evenly throughout the year, but our diary seasonality will remain the same. For 2007 we expect the historical trend to remain largely intact with the limited number of markets commercializing PPM this year. However, the second quarter will be burdened with incremental costs associated with Philly and New York and relatively modest incremental PPM revenue in the second Quarter. The fourth quarter, on the other hand, will benefit from us being further along in the rollout and therefore generating more incremental PPM revenue versus the second quarter. That includes my overview and I hope that information is helpful. At this time, I would like to turn it back to Nia and ask that we open the call up for questions.
Operator:

(Operator Instructions) Your first question is coming from Alexia Quadrani, of Bear Stearns.
Alexia Quadrani:

Thank you. I've got a couple of questions. First on the international opportunity you mentioned Iceland not being very significant to financials, could you review where you are in other European markets, particularly the UK, and how significant that opportunity could be?
Stephen B. Morris:

Okay, you want to do these sequentially. We will start with that one. We are doing work in Belgium, Norway, Denmark, UK, plus Kenya, Kazakhstan and Singapore. Each of them is separate. First of all, I will give you a response on the UK, but it is not particularly representative of the other countries. In '06 RACHR (PH), which is the research consortium that contracts for measurement, contracted with us to produce a panel that would be in London, which is a very large obviously part of their total mix. It is not a currency service; it is a kind of analytical evaluative flow of information. They had been working with ORB (PH), which is the TV joint industry committee, and the thought is that this could be over time developed into a multimedia TV and radio panels, so they would be getting information on that as well. Hopefully, what we have is that as this comes to fruition, it would lead to being chosen for the overall currency supplier, but they have not made that decision at this time. So they pay us for this test; it is an interim step toward something that could be larger in the future.
Alexia Quadrani:

And back here in the U.S., a couple of questions on the PPM rollout. Who is not set to be encoded right now at this point in New York? Who has not agreed to be encoded yet for the New York marketplace? And then is your schedule for 2008 still very much on track? And last question on the PPM U.S., how much of the cost, if you can sort of estimate or generalize, for the '08 rollout plans does fall into the second half of '07?
Stephen B. Morris:

I will take a first two of those and Sean will take the third. We are about 40% of the way up the curve in New York in terms of recruiting the panel, which is I think almost exactly on plan. I don't know exactly the detail of where we are in terms of the encoding process. I think we have contracts that represent about 40% of the New York market in terms of contracting for the service. They are presumably the easier ones to get encoded. And then the ones who are not under contract PPM overall would presumably be the ones who would be the slowest or last in line to get themselves encoded. We are on track in terms of the panel, and we are working our way along to the encoding, and obviously saw flows from Philadelphia to Houston. And as Sean mentioned, we are in the process of working with some of those major groups that are not signed up to bring them on board. At the moment, it appears that is going to go market by market for a while. I think that is the first piece.
Sean R. Creamer:

In terms of the cost in '07 related to '08, we have not provided market by market information on revenue or expenses. What I will tell you is the guidance we have issued contemplates the spend we will have to do, and that is six to nine months in advance of market commercializing. And with Chicago and L.A. commercializing in January, two large markets, there is significant cost obviously associated with getting that panel up in place, but that is contemplated in our guidance.
Stephen B. Morris:

Before you go on, Thom corrected me on my percent of the New York market. We have actually got 52% of the revenue in the market under contract, not the 40% that I mentioned.
Alexia Quadrani:

Just the last question and this may be too early, but any initial feedback from the advertisers or agencies on the Philadelphia data?
Stephen B. Morris:

They have really been digging into it, and there is a lot of kind of intense training going on from our end, and conversations now going on between the buyers and the sellers. That is a conversation actually that Arbitron is not really directly part of. So I think it is too early to tell what you know anything specific in terms of outcome, but again, I certainly can tell you that there is great intensity in terms of the dialogue going on.
Alexia Quadrani:

Thank you.
Operator:

Thank you. Your next question is coming from Jim Boyle, of CL King.
Jim Boyle:

Good Morning. Steve, when Philadelphia PPM went live, Clear Channel signed up for that market somewhat last minute. When Houston goes live in late July would you be stunned if Clear Channel did not sign up by late July?
Stephen B. Morris:

I don't know if the word stunned is one I can respond to, Jim, but they made a pragmatic decision in Philadelphia. Philadelphia has not actually gone live. It has gone live in terms of data collection. I think the word really applies to April 27 when the PPM data arrives and officially becomes the currency, and the fall book that they had been buying off of up until now drops out of a currency status. That is really the moment of truth for the marketplace. In Houston, it is hard to judge. They are encoding. They have been encoding there for a long time. I think that it depends on how Philadelphia goes, how strongly the buyers demand the kind of information in Houston that they're going to have in Philadelphia. And all of that will go into the decision process. But I really can't speak for Clear Channel in terms of how they will make that decision. We obviously are committed to moving forward and to opening the market, and obviously many discussions will take place between now and then.
Jim Boyle:

Sean, on the share buybacks, is there a share price range where you are more likely to consider buying, whether it is below $46, below $48, or is it more a timing situation such as progress with the PPM launch ramp?
Sean R. Creamer:

I think it is a balance. Obviously, we have been in the market pretty consistently. We have in place a 10B5 (PH) plan. And I'm not going to get into the specifics around that, but it was developed with the intent of executing for sure on an amount sufficient to, as we have historically done, to cover off any dilution coming from optioned exercises, etc. We have a $100 million authorization, and we're progressing towards that. But I think it is a balance of programmed buying and the flexibility of opportunistic buying on the side as well.
Jim Boyle:

Finally, Steve, Project Apollo, if this does indeed become a future ongoing service, how would you roughly see if the fee split? It this something that probably could be advertisers picking up roughly 75% of the tab and agencies 25% of the tab, or would it be different from that?
Stephen B. Morris:

This is very advertiser focused. The agencies would not be picking up 25% of this. I don't know the exact number, but agencies and the media, because Media are also advertisers, would pay some piece of the total, but the vast, vast majority of it would be covered by the advertisers. They get more in terms of the AC Nielsen home scan panel, which is very much driven by advertisers' support. This is not all the way there because there is a media component, and as I said, the media and agencies will be paying something, but considerably more than 75% would be paid by the advertisers.
Jim Boyle:

That actually seems to bode well since ad agency track record for paying for media research has never been terribly high.
Stephen B. Morris:

They actually buy a lot of research, but typically, particularly in the ratings end of it, pay the smallest piece. When you get to other forms of research ad tracking, for example, they pay a much higher percent. But you're right, their affordability in this area is less than the advertisers.
Jim Boyle:

Thank you very much.
Operator:

You next question is coming from Barton Crockett, of JP Morgan.
Barton Crockett:

Steve, I just wanted to follow up on a couple of points. One, your statement that you have contracts to be signed in Houston, and is fair to say you are negotiating contracts with radio operators. I guess that is my question. Is it fair to say that you're negotiating on contracts with the major radio operators in that market you know the main ones that you don't have contracts right now, you know Clear Channel, Cox, Cumulus, and Radio One? Would it be fair to say that you are in contract talks at this point or would that be an overstatement?
Stephen B. Morris:

We don't comment on negotiations specifically. But obviously this is, since this process (PH) has started to move it is, it would be unusual if we weren't having some kind of conversation, but they vary enormously from one group to another, and I really don't think I could generalize very effectively.
Barton Crockett:

Switching gears a little bit, in the press release you guys put in, Steve, you were quoted with this comment about Project Apollo which struck me as ambiguous. The results show promise, but there is more work to be done to demonstrate the value for advertisers, and to develop a media plan. Could you elaborate on that? I mean is there any particular push back from advertisers, some area where they question the value? And what did you mean by that?
Stephen B. Morris:

Nothing new or significant in that part, the reason to say that is that we really are only midstream in terms of providing them with enough data for them to make a decision. As you know, we were delayed last year as we were getting the big networks encoded, so the data really has only started to flow this winter. And our assumption is it is going to take several months now for our pilot customers to look at that data, and then work it through an internal value proposition within their own companies to figure out whether the value they get is worth the price. At the same time we're going to be doing a lot of work with them to, analytical work to produce these case studies that we started to go public with increasing frequency. This week, for example, we are in New York, two of the agencies that work with our pilot customers representing a case study about how Apollo was effective in a particular circumstance. And at the same time in Venice, Bernard Glock of Procter & Gamble was doing a keynote address to a world media gathering and talking favorably about how Apollo, they find it important and valuable within Procter & Gamble. So there is going to be a lot of that kind of work going on, building the value proposition. And we're not making an assumption about the outcome. We're simply in the process of feeding data, working with them analytically. And our expectation is that around the end of the third quarter, early fourth quarter, they will have enough information to come to decisions. But I wasn't suggesting in that comment that that is any different from the way we have viewed this over the last few months.
Barton Crockett:

Great. Then one final kind of topic here, and this gets into the competitive range and the media audit out there with the cell phone and Nielsen doing some stuff with cell phones out of home. Actually about those issues, first, can you give us an update on where we are with the patent litigation against the media audit (PH) where that is in the process? Then on Nielsen, they are doing an out-of-home kind of cell phone data collection on a national basis. To what extent would that be competitive with things that you guys are looking to do out-of-home on TV? And to what extent would that be a testimony of maybe the effectiveness of using cell phone measurements, which is one thing you guys have kind of questioned as part of the back and forth with the media audit (PH)?
Stephen B. Morris:

Good questions. The patent, there is nothing to report we are really just in that first early-stage of a patent litigation. We filed our patent. They fired their usual you know response. And you know now we are into a long, slow process that will be a long time in coming to a resolution. You have to assume at least a year. On the IMMI (PH) Nielsen announcement, there are not a lot of details out on that, but I think that we are viewing that as analogous to the kind of deal that Nielsen signed with Tivo regarding DVR consumer behavior. What they did was they licensed data from an existing niche provider, and then they offered as a supplementary information service to the Nielsen currency system. This seems to be in that category. We still view a cell phone in terms of providing currency data as having some significant flaws, and we have felt that for a long time. It doesn't mean there isn't a role for cell phone in the kind of area that Nielsen is using it, or in some other way, but as the kind of central provider of data for a currency service, we still continue to see that as a flawed approach.
Barton Crockett:

Okay that’s great thank you very much.
Operator:

You next question is coming from Maurice McKenzie, of Signal Hill.
Maurice McKenzie:

A couple of quick questions, first postage rates were expected to increase in mid-May. Can you discuss the magnitude of impact on Arbitron from this rate increase?
Stephen B. Morris:

I'm sorry, what?
Sean R. Creamer:

Postage rate increase.
Maurice McKenzie:

So May 14 a postage rate increase goes into effect. I just wanted to you know sort of discuss what impact if any that has?
Stephen B. Morris:

One, it doesn't come as a surprise. We have some warning time. It is a significant element of our cost structure with our diary business. But we budget with an expectation that there will be diary rate, excuse me, postage rate increases. And that would have been contemplated in the guidance, so we're accountable with that.
Maurice McKenzie:

Hopefully by then. The second is you recently held a Project Apollo roundtable discussion at the University of Wisconsin. Can you just discuss a couple of the main takeaways from that meeting?
Stephen B. Morris:

Well I was not there. But it was a very positive session because we had, two of our pilot customers were there, and a bunch of students and a bunch of companies that are part of this Wisconsin program. There were a number of very positive quotes that were (indiscernible) emerged from that whole thing. Apollo, when you deal with it in that context, always gets immediate and positive response. It goes right at this single source, holistic view of the impact of media on consumer behavior, and as you can imagine in that kind of academic forum that the power of that idea is fully appreciated. And so people were, our pilot customers, as always, were great advocates for Apollo. We don't have to make the pitch ourselves. And it was generally a very positive session.
Maurice McKenzie:

Finely on MRC accreditation, can you just update us on where you are in Philadelphia?
Stephen B. Morris:

In Philadelphia we are, as you know, we're not waiting for final accreditation before we open the market. The rules of the road are that you need to have completed an audit by the accounting firm that does this auditing work for the MRC. And they establish whether or not you have in any way materially breached the minimum standard of the MRC. And if the answer is that you have not breached the minimum standard, then you are free to go ahead. We are on track to complete that whole process prior to actually delivering the data. So on track there. And what we have said we would do is, as was true in Houston, a long period of time can pass between the successful audit and the actual granting of accreditation. And I suspect that same thing is going to happen here. So we will be audited and we will be operating by the rules of the road in Philadelphia, and working to complete this with accreditation over the next whatever number of months it takes to get it done.
Maurice McKenzie:

Thank you very much.
Operator:

You next question is coming from Mark Bacurin, of Robert W. Baird.
Mark Bacurin:

One quick one, Sean. I just want to confirm, you said CapEx for the quarter was $2.4 million?
Sean R. Creamer:

$4.2 million.
Mark Bacurin:

$4.2 million, sorry, okay, I thought $2.4 million sounded a little low. On the guidance for '07, this 5.5 to 7.5 range I understand the low end would obviously contemplate not signing any of those holdout customers for PPM. But I was wondering if you could break down for us of the you know maybe the midpoint of the range, how much of that is expected PPM price list in the back half of the year versus sales of ancillary services, which I know have been soft over the last 12 months or so, versus just normal price escalators under your legacy diary-based contracts.
Stephen B. Morris:

As we have said the past, we're not going to, we don't manage the business as a PPM business and a diary business, and so it is our ratings business. And as a result, the lines are blurring, more particularly on the cost side than the revenues. But what we said on the last call was that the price increases as PPM rollouts start to pick up in pacing, and we have got more of them commercializing, the impact obviously is compounding. For 2007 it is not immaterial, but it is also not a wildly material positive. The comment we made about a tougher market for ancillary products means that we were expecting, or guided to expect, in the sort of pricing increase range for our legacy diary business around a 4%. So the 5.5 to 7.5% obviously is counterbalancing the price increases from PPM, or counterbalancing that to a certain extent. The larger impact and causing the slight acceleration comes from PPM. But it is not until really you get into the fourth quarter where you have got a market like New York up, you start to actually feel some of that pricing increase hitting our recognized revenue.
Mark Bacurin:

Can you give us we feel then maybe in the first quarter, if we back out those equipment sales, what you know you are around 7% growth, how much of that was aided by ancillary sales? Have you seen any bounce back from that from last year's softer trends?
Sean R. Creamer:

Well what I can tell you is in the first quarter we had one market up as a, in effect a PPM market up. And so the dollar contribution there for the quarter, well I'm not going to give you a specific number, was not material. So there were some positive trends in ancillary services in the first quarter, accelerated from the fourth quarter. I am not going to suggest that is a trend we necessarily assume will continue, but in the first quarter we benefited to a greater extent from ancillary services than we did from PPM pricing. The other thing I will tell you is there is timing issues. Renewals occur on a schedule. Sometimes they don't happen exactly on that date. And there was absolutely some occurrence of fourth quarter renewals rolling over into the first quarter of this year. And to the extent those renewals included that data, there's immediate revenue recognition there. There's a lot of things going on, but I think the first quarter showed, as Steve mentioned, there was signs of improvements in the radio market, not wild improvements. But I think that is fair to say about our ancillary services as well.
Mark Bacurin:

I guess what I'm trying to figure out is as you start to rollout PPM, and obviously there's a lot of data there that needs to be massaged and thought about by the broadcasters, will the incremental analytics that are needed for that, is that baked into the price increases related to the PPM currency price? Or do you think there's an opportunity to see an uptake in some of these ancillary products and services as PPM is rolled forward as well?
Sean R. Creamer:

Certainly, our commentary around ancillary services was specific to the rollout period and the fact that our customers are trying to digest the price increase related to PPM. There's no question there is more data available with PPM. And that means we, it is incumbent on us to continue to provide the tools that allow them to convert that data into information. So by no means are we suggesting ancillary services never recover, we just think there's a digestion period, if you will, of the PPM price increase before I think it is a sustainable trend.
Mark Bacurin:

Steve, you touched on this a little bit, but just as it relates to Project Apollo I know the television network encryption was a big deal. And it sounds like you have basically overcome all of the more blocking and tackling operational type issues now that slowed the collection of data. I just want to confirm that that is correct. And then as you go several months with these customers actually having that data, are there any other big critical hurdles that have to be overcome? It sounds like they are enthusiastic about the information they are getting, and it is going to come down to basically how much actual it cost you guys to collect it versus the price they are ultimately willing to pay. Is that, as you see it, the biggest impediment to whether or not it gets commercialized? It is just the margin you can make on that ultimately?
Stephen B. Morris:

Yes. I wouldn't want to say that all the executional issues are finished on Apollo. That project is always going to push the limits of PPM's capabilities. There is an infinite desire for information. They would like to be able to encode ads, 60 second ads, 30 second ads, 15s, 10’s you know the Apollo tech, the PPM technology, you know we're pushing it as far as we can to support that need, but there is always going to be at a lot of executional things driven by the fact that the advertisers are very demanding in terms of what other information they would like. But I think we have it flowing well enough to supply them with the information that they need, and therefore really the major hurdle is the one that you described. It is whether or not, as they look at the data in the context of their companies, and the decisions that they make about media, whether they can see a value proposition that justifies the cost.
Operator:

Your next question is coming from Richard Tullo-Sidoti.
Richard Tullo-Sidoti:

In regards to PPM adoption in New York, do you think that recent events with Don Imus (PH) will have any impact on the likelihood of Clear Channel needing that information to be more competitive?
Stephen B. Morris:

In New York, of course, Imus is CBS/WFAN (ph) revenue contributor, so the impact on Clear Channel I don't think would be particularly material. I don't thing that any event like Imus, or whatever, really gets into the picture very strongly with the decision by a major group. It may be true that when CBS came on board first last year that they were thinking, because they were making a lot of changes in programming in a lot of stations round the country. And conceivably that influenced them to say, hey, this is the kind information that would help us when we're making a number of format changes to track the effect of that. But in any given market like New York, I think it is now very much sort of central to a decision that a Clear Channel or a Radio One or whoever would make about participating in PPM, and that is far larger than any one programming decision.
Richard Tullo-Sidoti:

In regards to Project Apollo, what will the cost, the development costs look like towards the end of the year, if you decide to go ahead?
Sean R. Creamer:

What we indicated was at the time of a commercialization decision, we would be coming back to everybody with a much more detailed view of the going forward business model. The issue is we can't predict today what, if the decision is a go decision, whether that is to go from a 5,000 household panel to a 15, 20, 30, 40. So rather than speculate, what we said is we will come back and give the details as we have a better view of what commercialization means over the course of 2008. But obviously, any expansion of a 5,000 household panel to whatever number is going to drive incremental cost. But at this point it would be premature. It is a reason we are in a pilot. We want to continue to have our customers evaluate the data and get comfortable, and have us get comfortable, that it will be sold at a price point that allows Arbitron to return a ROI (PH) on that project that is efficient to support our going forward.
Richard Tullo-Sidoti:

Would you, last question, would you be spending on discretionary products, is that more because it was driven by PPM data, or was that driven by fundamentals in the first quarter in the radio market?
Stephen B. Morris:

I'm not sure I understand the question.
Richard Tullo-Sidoti:

The increased purchases of quantitative data, was that driven in your view more by the existence of PPM data, or was it separate from the PPM data?
Sean R. Creamer:

In the first quarter there was really very little of PPM. The currency data that is going to be delivered in Philadelphia is really an April delivery. And the uplift of the price increase really doesn't get recognized from a revenue perspective until that point. So they are really, it is certainly not a PPM phenomena that was driving first quarter.
Operator:

Your next question is coming from Kit Spring, of Stifel.
Kit Spring:

You probably (indiscernible) answer this, but can you give us some kind of general outlook as to what the upside might be for project Apollo? And secondly, can you talk about response rates and panel costs, both kind of for the diary and the PPM? And then just based on your current plans for PPM, and assuming you don't go with Project Apollo, do you return to earnings growth next year or in '09?
Stephen B. Morris:

Let me do the first two and I will have Sean do the third. The answer it is no, we're not going to give you the upside on Apollo because we have, tried to answer this question before. The problem is, as Sean was saying, is there so many scenarios. There certainly are some very bullish assumptions that would say that if you could penetrate every vertical and get all the major advertisers that would be a very large business. If, on the other hand, it is primarily a package goods business, it is a far smaller business. We're trying to get some shape around that. I think it would be much better if we wait a few more months and see what the customer reaction is here. Then when we present a plan that indicates what the investment would be and the kind of return that we're expecting, I think at that time you might put some scenarios around it that would give an answer to your question.
Sean R. Creamer:

Just a, furtherance on that point, obviously, we are partnering with The Nielsen Company in this, and we're a much aligned in our goals. I don't want to imply or suggest that a go, no-go decision is an Arbitron only decision. We're working closely with The Nielsen Company towards a, I think a common vision and goal. And our expectations on return and our expectations on customer support I think are every much aligned. So it is a very collaborative set of conversations that are happening throughout the course of this pilot period. In terms of your comment on response rate and panel cost, the reality is the trend in both those, or more specifically response rate it has become and remains increasingly more difficult, given privacy issues and others, to recruit panelists and recruit diary participants. We don't foresee any immediate change in that trend. We have historically been pretty good at identifying opportunities and efficiencies within our business model to mitigate the cost in that particular area that have been growing at a rate above inflation. And we certainly have not conceded that we will be able to continue to do that. But I will tell you a five-year rollout period is a long period, and we will continue to be fighting against those trends, because I don't think Arbitron is unique in terms of research companies that are seeing that to be the case. And there are a limited number of options you can go to after you have continuously made the operation more and more efficient. I think in the short term we're very comfortable. But the rollout period extends for five years, and it is just way too soon to tell whether, we're not counting on that trend reversing itself, but we continuously think that at some point it has to. But at this point it is a little too soon to tell. On your last question, in terms of Apollo, if the decision was a no-go in Apollo would, to make sure I understand the question would the profitability growth return in 2008 or 2009? We talked about the rollout implications in 2007 being the trough year. And we have said that Apollo, aside from our ratings business perspective, if we don't do Apollo, it doesn't change the economics behind our rollout. And in 2008 we will have more markets commercialized than commercializing for the first time, so there is some subsidy or subsidization that goes on. But not doing Apollo will not by itself restore our earnings growth or EPS immediately to the 2005 levels.
Kit Spring:

That is what I have. I just wanted to clarify that is still the case. Thank you.
Operator:

Your next question is coming from Troy Mastin, of William Blair & Co.
Troy Mastin:

I don't think you added any pilot tests versus (PH) Apollo in the quarter. Just confirm that for me. And if you didn't, why? I am curious if you have stopped your sales efforts here as you're going through the pilots or something else?
Stephen B. Morris:

You are correct. We did not add any in the first quarter. Wal-Mart was the last to come on-board. I think they came in at the end of '06. We're really not spending a heck of a lot of time on that right now. If we can prove this, the concept with packaged goods, we have also retail that we can work with, given that Wal-Mart is part of it. That is enough to prove the concept. Those are and it is easiest and simplest from an executional standpoint if we focus on the PPM data and the linkage into the AC Nielsen home span panel. It was just a conscious decision that given that this, there are in fact a lot of executional challenges, the encoding was certainly the most prominent of those, that we were better off staying very focused, work on this one, the packaged goods business is typically the largest spender on this kind of research. And so we're dealing with a kind of number one category, and we're dealing with very high-profile customers, like Procter & Gamble and Kraft and Unilever and Pepsi, etc. So we feel like we have the right customers and the right focus, and given all the executional issues, we're better off just to stay with that. We made pick up a couple of more customers before we get through the decision time, but that is not an assumption we're making right now.
Troy Mastin:

Then regarding Clear Channel and the process that is ongoing there with their potential buyout, is that having a notable impact on negotiations with them? Do you have any sort of change or control provisions in your initial Philadelphia agreement?
Stephen B. Morris:

The buyout, this whole conversation has been going on for a long time. And I think they have, if there is an impact, we don't see it. They are running their radio business as they have. They do not seem to be changing their philosophies based on this impending decision. I'm sure internally it has taking up an awful lot of time and energy, but no, we don't see a direct impact on it. If they are bought out it would not affect our contract. Clear Channel contracts would survive whatever buyout took place.
Troy Mastin:

One more, you mentioned 52% of the New York market is under contract. I wonder if you have data for the other four major markets that you're in the process of, Philly, Houston, Chicago and L.A.?
Stephen B. Morris:

Well in Philadelphia we are at 93%. Houston we are still very low, it is 25 or 30%. We're still the beginning of that, where we were before. And in New York, as I said, it is 52. So it varies quite a bit from market to market. And I think our history in Philadelphia is that as commercialization approaches, and we move into the free currency period, in Houston for example, where the PPM data is currently provided to everyone, as of the beginning of the free currency period it becomes available only to subscribers. At that point the kind of pressure increases as well all of us move toward that final moment. And just based on the Philadelphia experience I think that is when the negotiation would become the most fullest.
Troy Mastin:

Is it too early to have anything on Chicago and L.A.?
Stephen B. Morris:

We have, you know something, I don't know what the numbers are on those, but obviously based on the contracts we have signed, the (indiscernible) contracts with people like CBS, for example, which cover all of their stations, we obviously have some percentage of all of those markets under contract. We have those numbers and we could provide them. Just give us a buzz afterwards and we will give you the specifics.
Operator:

We are now out of time for questions. I would now like to turn the floor back over to Steve Morris for any closing remarks.
Stephen B. Morris:

I want to just again, thank you for your time and the questions. We're approaching a very important transition moment. Going live in Philadelphia on the 27th is really a huge event and the next few months should be very important. But other than that, again, thank you for your time. And we will be keeping you informed.
Operator:

This concludes today's Arbitron first quarter 2007 earnings conference call. You may now disconnect.

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